When Filing Becomes a Risk: The IRS-ICE Agreement and the Erosion of Voluntary Compliance

The American tax system rests on a bargain that most taxpayers never think about. The government asks people to report income honestly and pay what they owe. In exchange, it promises to use what they disclose to administer the tax laws and for little else. Since the post-Watergate reforms of 1976, Internal Revenue Code § 6103 has made that promise binding: tax returns and return information are confidential, and the exceptions are narrow.

The April 2025 memorandum of understanding between the IRS and the Department of Homeland Security strained that bargain. ICE requested the last known addresses of more than 1 million individuals it believed were unlawfully present. IRS employees provided 47,289 records to ICE before a federal district court halted the process.

The Legal Fault Line

The arrangement relied on § 6103(i)(2), which allows disclosure for certain non-tax criminal matters but imposes strict requirements regarding who may request information, how it may be requested, and for what purpose. In February, Judge Colleen Kollar-Kotelly found that the IRS violated the law approximately 42,695 times by sharing confidential taxpayer addresses with ICE. On September 8, a unanimous D.C. Circuit panel upheld that ruling, writing that the policy “indisputably contravenes the requirements of Section 6103.” The court also warned that government personnel could face significant civil and criminal consequences for willful disclosure in violation of the statute. In a parallel case, a Massachusetts federal judge barred DHS and ICE from using or viewing any IRS taxpayer information obtained under the agreement.

The legal landscape remains unsettled. An earlier D.C. Circuit panel declined to issue a preliminary injunction in a separate challenge, and the Congressional Research Service has noted that Congress could consider amending § 6103(i)(2) if it wishes to address the issues currently being litigated. Further appeals are possible. However, the compliance question does not depend entirely on how the litigation ends. Taxpayers respond to perceived risk, not to the fine print of injunctions.

The Compliance Problem

Congress created the Individual Taxpayer Identification Number (ITIN) so that people who cannot obtain a Social Security number could still meet their tax obligations. Many ITIN filers are undocumented workers. Others are lawfully present spouses and dependents of individuals holding a different immigration status. They filed because the system assured them that it was safe to do so. Undocumented immigrants pay nearly $100 billion in annual taxes, and their tax information has historically remained separate from routine immigration enforcement efforts.

That confidentiality served as an incentive. Voluntary compliance is the government’s least expensive enforcement mechanism because the IRS collects most of its revenue through withholding and self-reporting rather than through audits. When a group of taxpayers begins to view a tax return as a potential locator file, that calculation changes. Several outcomes may result:

• Non-filing: ITIN filers stop submitting returns, forfeit refunds, and accumulate unfiled-return liabilities.
• Shifting to cash: Workers and employers move off the books, removing wages from withholding and payroll tax systems altogether. This may represent the greatest revenue risk because it undermines taxes that are currently collected automatically.
• Spillover to citizens: Mixed-status households often file joint or related returns. As a result, a U.S. citizen spouse or parent claiming children may also hesitate to file.

A brief submitted by 115 lawmakers argued that the agreement could deprive the federal government of tax revenue. Internal concern was evident as well. The acting IRS commissioner resigned last year over the arrangement.

To be clear, the magnitude of any compliance effect has not yet been measured. Enforcement officials argue that tax records are necessary to locate individuals with final removal orders, and that concern is not without merit. But the potential revenue cost remains a testable hypothesis, not a proven outcome, and the data needed to evaluate it will emerge soon.

What to Watch

For practitioners, the early indicators are straightforward: ITIN return volume during the upcoming filing season, new and renewal W-7 applications, changes in refund claim patterns among ITIN filers, and any increase in clients asking whether filing remains safe. A decline in these metrics would provide the first concrete evidence of eroding compliance.

Practitioners should also maintain a commitment to accuracy. Filing obligations have not changed, and non-filing carries serious consequences of its own. Advice that promises complete safety overstates what the courts have decided, while advice encouraging taxpayers to stop filing may cause significant harm. The most defensible message remains that the law protects taxpayer information, courts have thus far enforced those protections, and the future of the agreement remains uncertain.

The Larger Stake

Section 6103 was enacted based on the principle that taxpayer confidentiality is not merely a courtesy but a foundational requirement for collecting revenue on a large scale. The IRS-ICE agreement puts that principle to the test. If the courts maintain their current position, the damage may be contained. If they do not, or if the perception of risk persists long after the litigation concludes, the government may discover that it gained little from enforcement while sacrificing a great deal in voluntary compliance.